The Crackdown on Insider Trading: How It Started and Where It Is Going

The government’s crackdown on insider trading, especially by hedge funds, has now entered its seventh year and it does not appear to be losing steam. Curiously, the government has made insider trading a top priority, even though it had no measurable effect in causing the financial crisis of 2008. Nor does the government contend that insider trading will destabilize the capital markets in the future. How insider trading came to be a government priority offers unique insights into how the Department of Justice and the SEC prioritize securities violations. Curiously, regulators and law enforcement knew in the early 2000s that mega hedge funds—the Galleon group, SAC Capital, and Pequot Capital Management—were engaged in continuous insider trading, but failed to allocate the resources to prosecute the giant hedge funds who used insider trading as a business model.

This program will offer insights into why, and how, the government abruptly shifted its policy. We’ll also discuss how the government is now failing to effectively prosecute another form of market abuse, the sale of counterfeit stock. While the government allocates massive resources in the seventh year of its crackdown on insider trading, few of those resources have been allocated to prosecute other forms of market abuse. Consequently, the mega brokerage firms freely engage in naked short selling, a practice which FINRA recognizes may destabilize the capital markets. Why does the government prosecute a non-cause of the financial markets which does not threaten them, while ignoring a form of market abuse which could bring the capital markets to their knees? This program will delve into:

•Why hedge funds and their principals have a greater risk of being prosecuted for insider trading;

•Knowing how and why the insider trading crackdown got started offers insights into where it’s going

•Why the government thought mega hedge funds were too big to prosecute

•Why and how the government decided the mega hedge funds were vulnerable for insider trading

•Why the government ignored massive insider trading by the mega hedge funds until Congress put a high beam on it

•Why the sale of counterfeit stock is now too big to prosecute

YOUR SPEAKER:Gary J. Aguirre headed the SEC’s groundbreaking insider trading investigation of Pequot Capital Management, once the world’s largest hedge fund. Mr. Aguirre’s strategy in the Pequot case became the SEC’s blueprint for the Galleon Group and SAC Capital Management cases. Until Pequot, the SEC did not track whether hedge funds like SAC or Galleon were repeatedly the subjects of different investigations. Mr. Aguirre focused on the institution—Pequot—as a vehicle for repetitive insider trading. The SEC initially resisted Mr. Aguirre’s new approach, blocking his efforts to investigate multiple suspicious trades by Pequot, according to a Senate report. The same Senate report confirms the SEC fired Mr. Aguirre when his Pequot investigation got to close to an elite Wall Street banker suspected of tipping Pequot about a pending merger. After his firing, Mr. Aguirre sued the SEC under FOIA to get his investigative files and won, Aguirre v. SEC, 551 F. Supp 2d 33 (2008). Forbes discussed what happened next: “After a scathing 2007 report by the Senate criticized the SEC’s handling of the Aguirre’s Pequot investigation, and after Aguirre dredged up the smoking gun emails and passed them along to the Senate, the FBI and the SEC in late 2008, the SEC reopened the case in January 2009.” Relying upon the evidence uncovered by Mr. Aguirre, the SEC filed a civil action against Pequot and its CEO in May 2010, which was simultaneously settled for $28 million. Mr. Aguirre’s practice focuses on securities litigation and representing SEC and financial industry whistleblowers. He has published multiple articles discussing SEC regulatory practices, including one which won a prize awarded by the SEC Alumni Association.

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